It’s been two years since I paid off my rental property mortgage I took on in 2003, and already the satisfying feeling of accomplishment has worn off. Perhaps the reason why the feeling was so ephemeral was because there was no congratulations card, fancy dinner celebration, or surprise gift from the Anti Debt Welching Coalition For A Better America. The only thing that changed was an extra $1,308 in cash flow, which goes straight to savings.
Before taking on this mortgage, I experienced an eerily similar feeling of ambivalence in my early 20s. After working for 60+ hours a week from 2009 – 2001, while saving 100% of every bonus and 50% of each paycheck, I started thinking, what’s the point of it all? Maybe I was experiencing a quarter life crisis. What I did know was that I no longer wanted to work in finance because making money felt pointless, especially after September 11 happened.
I was *this* close to leaving San Francisco for Honolulu in 2003 until I found a 2/2 condo overlooking a park in Pacific Heights for $580,000. Once I took out the $464,000 mortgage, my motivation to work hard shot through the roof! Suddenly, my paycheck felt meaningful because if I welched on my mortgage, I’d lose my $116,000 down payment and trash my credit score.
POWERING DOWN WITHOUT A MORTGAGE
Without debt, life is easy. And when life is easy, why would anyone but the craziest of people bother to take risks? It’s totally irrational to work hard if there’s no financial burden. Forget about trying to start your own huge business when you can just enjoy life now.
When I made a new year’s resolution to pay off the rest of my ~$100,000 mortgage by the end of 2015, I unleashed an inner beast. Instead of continuing to consult for 25 hours a week, I got motivated and took on two more consulting jobs for a total of 60 hours a week for three months. All three companies were fascinating to work for. But making some extra money in order to pay off the mortgage was a significant motivator.
I noticed that as soon as I wrote the final check, my whole attitude changed. First, I stopped looking for more consulting work even though two out of the three contracts ended. Second, I decided to go on a 3.5 week trip to Asia to live life like a digital nomad. I then spent several days up in Yosemite to see if bears poop in the woods. Then I went to New York City for two weeks to watch the US Open and see some friends!
Finally, I’m now quizzically thinking of selling the property again in order to simplify life. There is little motivation at the moment to try and maximize cash flow, despite still being $50,000 away from my $200,000 a year passive income target.
Sure, not having to work 60 hours a week anymore means less stress and a healthier lifestyle. But it’s not like I was stressed or unhappy working those hours in the first place. Instead, I was pretty thrilled to be able to do what I wanted to do while making a very healthy income. Something new occurred every day.
The biggest downside to paying off your mortgage is the complete loss of motivation to take risks and work hard. Only when your back is against the wall will you do everything possible to change. Having a mortgage is like an implicit back stop to not slack off.
My last mortgage payment on 5/12/2015. Balance was $464,000 in June 2003
REASONS NOT TO PAY OFF YOUR MORTGAGE
Here are some other reasons to not pay off your mortgage.
1) You lose your mortgage interest deduction. The mortgage interest is treated like a business expense for rental property and a tax deduction if its your primary residence. The higher your tax bracket, the more valuable the interest expense. For those in the 33% Federal tax bracket or higher, it’s probably a better idea to keep your mortgage for as long as possible.
2) You lose a low borrowing cost. Interest rates are at close to all time lows, and they are scheduled to go up by the end of 2015 and in 2016. It makes sense to hold onto a low fixed mortgage rate for as long as possible . My mortgage had an interest rate of 3.375% a year. That’s pretty cheap for a rental property, given rental property mortgages are generally 25 – 50 bps higher.
3) You tie up capital in an illiquid asset. Unless you have a very diversified net worth, having a lot of capital tied up in a property can be bad. Your property could blow over in the next storm, or burn down in a fire. If you are underinsured, you will pay dearly as insurance companies make it difficult for you to receive full benefits from a claim. Most Americans have a majority of their net worth tied up in the home. When the housing market collapsed, so did the net worths of millions. Hence, it may be best to have as little equity as possible or simply sell.
4) You decrease your financial returns. If you put 20% down, a 4% appreciation on the property means a 20% cash on cash return thanks to leverage e.g. $100,000 down payment on a $500,000 house that appreciates by $20,000 = $120,000 equity, a 20% increase. If you’ve paid off the other $400,000 in mortgage early, the return falls all the way down to 4%. Of course, with the $400,000 you used to pay down the mortgage, you might also blow yourself up by investing in Chinese stocks at the peak.
5) You might start being less efficient with your time. Instead of consulting for lots more money, I decided to spend my time discovering what it’s like being an Uber driver. After all expenses, I’m only making $22-$25 an hour driving, which is not that bad if you want to sign up, especially to get the sign up bonus. But if I found another consulting contract, I could easily make 10X that amount. If I focused on my personal finance consulting practice, I could make 20X that amount. When it comes to making money, less debt can make you less disciplined. But I drive because I’m curious and fascinated with people’s stories.
RIGHT SIZE YOUR DEBT EXPOSURE
If you love the feeling of progress, think twice about rapidly paying down your mortgage, especially if you only have one. “Thankfully,” I’ve got three more! I’ve now got to re-create that sense of urgency to pay them off because it’s hard when the rent is multiple times higher than the cost.
The only people who really complain about having no debt are those who are greedy for more money. They wish they had more liquidity to invest in the next hot stock or buy that diamond in the rough fixer. But greedy people are generally never satisfied.
Ideally, we’ll all have $0 debt by the time we retire. After inputting various realistic expenses in my free retirement planning calculator, I’ve calculated that I can pay off all debt using current and anticipated cash flow in under 20 years. I’d like to think I’ll be as active at 58 as I am today, but chances are high that I won’t be as motivated. I’m already suffering from arthritic thumbs from typing too much on my iPhone.
Figure out when you plan to retire and divide your debt by the number of years left you plan to work. Now come up with a plan to be debt free by your retirement date. You’ll be glad you did!
Recommendations
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Updated for 2019 and beyond.
I appreciate the article….as you are there and I’m in pursuit of it. BUT I will have to disagree and am a little perplexed to your article. If you enjoyed the things you were doing, why did you lose the motivation based on a demand of money? For me…I’ve never had much and constantly risked the little I had to make leaps in life. I’ve now done that successfully…BUT everything I want to pursue comes with HIGH risk. I like taking those risks, but not at the potential of losing my home that I’ve finally found a foundation. Hence, my reason for researching whether to pay it off. There are some benefits/burdens to each side, but imo if you need your back against the wall to motivate you….I’d suggest that you are NOT doing what you WANT to do in the first place. I pursue a lot of business, but mainly am in pursuit of my passions in the creative spectrum….and unfortunately there is no guarantee of roi on creativity. I do thank you for your article…because it showed where I still want to go, as today I’m in a frustrating place attempting to find the silver lining.
Hey Sam,
We are choosing to pay off our rental property first with an interest rate of 5.375, which is on plan to be paid off next November. Our original plan has always been to pay off our owner occupied rental property after the rental property to increase our cash flow and reach FI. We have financial milestones along the way eg pay off student loans, rental property, etc that we will look to take a review of the long term plan and if it is the best plan for our current situation.
As time goes by and we reach these milestones, contribute more to savings/investments, it leads me to thinking we will not pay off the next mortgage so quickly, but rather put it all in taxable investments as we diversity our capital and have more options with our plan moving forward. Nice to see someone a step ahead and read about the results;)
I certainly know the feeling of accomplishing one goal and needing to have another goal to follow up with next. I think finding that new goal in place is important, we all need to be motivated by something.
Nice job! I would be paying down 5.375% debt all day long. That would be a great return for 2016 and years after that as interest rates remain low. Furthermore, you’ll ENJOY that payoff feeling and that feeling of progress.
I am at your current planned retirement age, and believe me, I am not ready to retire. You may find that out, too. Best laid plans….
My original program was to have my own business (have had for 25 years), invest in real estate and diversify into farming. Those three endeavors encapsulate 99% of the government’s gifts to the taxpayer in the form of deductions. Lately I have diversified into programs that offer either tax credits or tax free cash grants (solar and geothermal).
All piled upon one another and intertwined reduces my tax burden significantly (as I am in the highest tax bracket-definitely the 1%). However, it all takes planning, as you suggest. The original real estate ploy was buy one annually (minimum down payment) for 10 years, then sell one at a time. This is especially good for commercial property since the depreciation time is shorter.
And, just to note, I didn’t start in the 1%. I started with $16,000.00 from my deceased parent’s life insurance policy and nothing else. And I had $32k college debt (1984). To note here, loosing your safety net will get your butt in gear as well.
The recession and housing market decline put the real estate program off a few years, and I have, as yet, not sold a single property. But, like you said, debt keeps you in the traces pulling for all you are worth. I think this is a good place to be.
So, plan for cash flow in retirement, but realize that you may never retire, and that is a good thing!
This is an interesting post for me. I have seven fixed rate rental mortgages (on 6 properties) in addition to my home mortgages, so obviously I’m comfortable with leverage. On the other hand my husband and I have a good bit of free cash flow and are torn between investing in taxable accounts, hoarding cash or accelerating debt payments. Our weighted average interest rate on all debt is under 4% – and the effective rate is even lower as we’re in the 33% federal bracket.
My financial brain says it’s silly to prepay that cheap fixed debt. My money market should be paying more than that again in a few years. Still, we want to reach FI within 8 years so paying off our mortgage (and many a rental or two) by then would be ideal/necessary.
As for motivation I think what you’re feeling is totally normal and rational. If you have few expenses and high passive income, why WOULD you be motivated to work harder? The less debt/expense you have – and the higher your income – the less you need (and should want) to work, at least in the traditional hustle sense.
I struggle with that concept too. We’re so focused on early retirement/FI, but our lives aren’t bad at all now. I ask my husband regularly what exactly it is we are so anxious to do once we don’t “have” to work anymore. It definitely makes it harder to choose the frugal alternative, cut expenses, or pay off debt when we aren’t “backed against a wall” as you say.
I think about buying a house instead of renting from time to time but I feel it would put my focus in the wrong place. I mean right now I rent and I make a good income and life is simple. I like that simplicity. I can focus on improving my skills in my occupation or my hobbies. I also have the ability to move to another country or something if some really great opportunity comes up. I guess I still think like a kid in some ways. The only reason I’d take out a mortgage is because I want to have a cat, but I’d have to rent a really expensive place to adopt one and it doesn’t seem worth it to spend so much money on a rental. Also I really like having no debt. Hard to say if I’d be happier with a mortgage debt, but I think I’m okay where I’m at.
The largest debt we paid off was the car (still working on the house). We still love the feeling of being free of that debt (even 8 years later). We haven’t started paying extra towards the house as we still have other savings goals (maxing out retirement, kids college, investments, etc.). But once the house is paid off there are other purchase goals (low priority at the moment) that the extra cash will go towards.
Holy timely article Sam! Good job paying off that mortgage so quickly. You probably have a pretty favorable mortgage debt to property equity ratio now?
My wife and I have had this conversation multiple times over the past few weeks–pay off our rental property mortgages vs. buy another rental. I am 39, we have 3 rentals and are under contract to buy a fourth. Market value of the rentals we currently own is 1.75M, and we have 617k in mortgage debt on them. I think we are being fairly conservative, but if it were up to her she would pay off all loans before getting another property. The largest mortgage of 300k is a 15 yr fixed rate loan. (I also have 196k (I know ouch!) in low interest student debt btw)
I like rentals and would like to build up a few more (enough to get me closer to the range of your passive income goal) before aggressively paying off the mortgages. Once we have 5 or 6, then I think we will be done with the acquiring phase and can focus on paying them down.
I work a day job and we don’t have another current passive income source besides rentals. If we had another passive income source (like your website/book, etc.) we could be done with 3 rentals and might focus on paying them down now like you have.
I think the points you make in your article are valid. It is a bit silly for commenters to chastise you for them, when it is your own personal goals and risk tolerance that influence how quickly to pay off debt.
3.375 is a pretty amazing rate for a rental IMHO. My mortgage rates are 4.25% for a 4plex and 5% for each other multiunit (more that 4 units=commercial loan/higher rates). The loan I am considering right now for a 4plex puchase is 4.5% 30yr fixed with no origination charges and a small lender credit. I checked out 5/1 arms for investment properties and the rates and fees for the banks I checked were almost identical to a 30yr fixed! Maybe the banks wizened up after reading your article on ARMs vs fixed rate loans. :)
Hi Spence,
Good to hear from you. Let’s see how you guys feel w/ a 4th first, before going to #5 and #6! The older I get, the less hassle I want to deal with. I think that’s the same for most people.
Your debt / equity ratio is pretty low, so that’s great.
What type of education did you guys get to go $196K in debt? We’re a similar age, and William & Mary cost $2,800 a year in tuition!
Don’t worry about chastisement. Being judged is a joy!
Cheers
Ha ha I know what you mean about wanting less hassle. I had a unit remodeled this summer and some exterior work done and I was reconsidering my use of rentals to build passive income. It was painful trying to get the contractors to finish the job bc they are so busy! I used your advice though about holding the carrot of another future job in front of the siding guy and I think it helped but he still took forever.
$2800 seems like a steal for a reputable institution such as william and mary. I too was lucky enough to go to an inexpensive university for undergrad and graduate without debt by working summers, parental assistance and a small academic scholarship. The student loan debt is from med school, which was 226k by the time I graduated from residency 6 years ago. I had it much better than many guys graduating now, who are 300-400k in the hole after med school and at 500k plus after residency. ouch.
I enjoy the blog and your frequent posts keep me checking back often. :)
Very interesting article. My wife and I sold our condo (condo which we made 42% on in 4 years) last year and bought a home in San Diego. We owe about 485k after paying on our house for 7 months, (financed 493 after putting 31% down on a 30 year 4% fixed). My goal is to pay off our house in 6 years and we can do that, but currently I am not paying extra rather stocking cash away in case their is a dip in real estate and we can purchase a rental property.
I’ve debated re-fing to a shorter term loan but am undecided on what to do. Our combined income is around $220k/yr, no debt besides $500/mo worth of car payments (0%) and our home. Sitting on about $110k in liquid cash + 80k in 401ks/deferred comps, both my wife and I are 28.
My goal was to have our primary mortgage paid off by 35 and have at least one rental property. We have no kids, and don’t plan on it anytime soon.
Would love to hear your thoughts on mortgage/rental options or pay down of primary.
I would keep primary and pay down the rental if you had to choose one or the other. Is the rental rate higher than the primary too?
Always refinance BEFORE making your house into a rental! Pls read the post.
i would disagree with this logic. it makes more financial sense to pay off the primary loan than the rental loan as the primary loan interest is “above the line” and the rental loan interest is “below the line”. also, since you need to exceed the standard deduction threshold to even see “benefits” from the primary mortgage interest, the overall gain of primary loan interest deduction is very minimal unless you have a huge mortgage.
however, there is benefit to paying off a smaller loan and just being done with it. i would assume most rentals fall into the smaller loan category when compared to one’s primary loan amount.
How is the primary loan interest above the line? Both are deducted to income. One is your personal work income for a primary, the other is the income from rental income.
In SF, the large majority of mortgages are way beyond the standard deduction as the median price here is $1.18 million. But yes, if you are below the standard deduction, the primary becomes less valuable.
How many properties do you own? And have you paid any of them off?
This hardly ever happens, but I soooo disagree with much of your post. So you lose your mortgate interest deduction of 33%. But aren’t you getting back the 66% you were losing. Also, do you really expect me not to pay off my mortage early because my home may catch fire? I have a feeling you wrote much of this post tongue-in-cheek? P.S. I’m adding an extra $400 per month to my payment and my 15-year mortgate will be paid off in 11 months, 18 months early. I can taste the champagne already.
I reflect on things to help people make rational decisions best for them.
Capital allocation is important.
Sam, I agree with you. I have always viewed myself as some sort of money generating machine with a bunch of different cogs (passive income streams) that need lubricating. The result when the machine is finished is an acceptable life style for my family and I that requires no more input in any way. The problem was that the only way to get the machine moving efficiently was to continually work on all of the passive income streams at the same time. I started doing this 15 years ago and just kept my head down.
I purchased my first property a single family 3/1 in 2001 in Santa Barbara, CA and had to borrow a bunch of money and stretch to acquire it. I rented out 2 rooms and watched every penny. In the run up to 2008, I leveraged myself to the hilt and sprayed out all of the leveraged money into different income streams and investments.
In 2003, I purchased a condo in Santa Barbara, CA and fully remodeled it to use as a high end vacation rental. Ultimately I sold it for a loss due to horrible neighbors. I chose to have less headaches down the road and take my loss. When I sold the condo, we were going to move into the house but I ended up finding long term tenants and now am cash flow positive and location independent.
My current debt/cash ratio is around 100%. I am financially independent at 42. I currently have 5 passive income streams that provide me with an after tax amount of around $84K and we live on about $60K.
I was a firefighter in SB and was forced into an early retirement due to an injury. Since I was not tied to SB for a job anymore, we had some choices to make. How much is enough? We decided to use a bit of lifestyle arbitrage and move to Nicaragua instead of staying in the states and one of us work.
I decided to have a child at 40 and it has been the best decision I have made. Instead of working, we have chosen to coparent in Nicaragua. Our daughter is now 2 and goes to a sustainable, organic farm school that costs $234/month. Her teacher has a masters in early childhood education, speaks 5 languages, and babysits for $7/hr.
I agree with your $200K maximum happiness even though I don’t really have any desire to put forth the effort to achieve it now. Being financially independent at 42 has made me realize that now, I have more time to deal with myself in my head and try to be a better person every day.
Add taking care of my daughter, exercise, etc. and my day is booked. In my humble opinion, If I was in your shoes, I would work until I had a child and then I would coparent like I am currently doing. My daughter is only going to be a child once and I am maximizing time with her. I can always work later if I want to. Sorry for the rambling, hopes this helps.
Justin
Justin, do you have a firefighter pension? I hear those are pretty good.
That’s a mighty fine passive income stream you got there!
I do have a tax free firefighter pension but I was also smart enough to have long term disability insurance as well. I chose long term security of the pension as opposed to up front $ like most people in terms of salary. It wasn’t too funny during the crisis when everyone was screaming that firefighters and teachers pensions were bankrupting everyone though. It seems to me that 99% of everyone that I meet ( and from the comments) that most people just work and work and don’t really know how much is really ENOUGH. Most people can’t even answer the question of how much money is enough? I can and I live it daily. Retired at 42, living abroad, saving $2k a month, still chasing unicorns and religiously following AAPL almost every day since I bought my first shares for $44 in 2004. I get to spend every day with my family or do anything else I want to within reason like you, just on a lower cost basis. While I was still working as a firefighter, I used to go to Thailand for 2 months paid vacation and was amazed at how much less I spent and how much more I enjoyed life living out of my backpack in a $10 night bungalow right on the beach. Then when I came back home, my bank account was actually larger than when I had left. By using lifestyle arbitrage now, I spend a lot of time in cheap countries, vacation in expensive ones, and visit the states for 3 months a year. During my 15 years of working/investing, my liquidity, cash flow, assets, etc. were all over the place. At times, I had 0$ and thought I would go bankrupt, other times $400,000 HELOC at my disposal. During this asset accumulation phase I got comfortable with debt, what I need to cash flow, what levels=no sleep and panic. These levels are different for everybody and have to take in account risk tolerance, goals, time horizons, etc. Anyways, once I figured out how to take care of myself and my family financially (thanks for your help) I have tried to drag others along to financial nirvana but no one wants to change their status quo. People ask for advice then when I ask them what their goals are I never hear from them again. Thanks again for all of the information that you provide.
Interesting in the UK most fixed mortgages are for 2 years, there’s currently only one product for 10 years which comes with a £1.5k application fee and a 4.5% interest charge (as oppose to around 3.4% on a 2 year fix) so most people opt for interest only and get hit with expensive remortgage fees every 2 years (usually around £1,000 to remortgage including broker fees).
Also from 2017 we will no longer be able to use interest payments as an allowable expense (unless you run the property through a business in which case the lenders available considerably dry up).
Family single lets are beginning to look a lot less favorable for me, I may buy one more then hold off until I can find something more creative (development opportunity, multi-let ect) that pays better cash flow.
Sam
Americans don’t realize how spoiled we are w/ our various debt instruments. Are debt markets run deep, and are more than twice as large as the equity market. Many countries only have one year fixed!
Sam, 3 of your 5 reasons for not paying your mortgage off early are either to minimize the interest cost or to take advantage of numbers that only exist on paper.
1) Lose your interest deduction?! So you’d rather pay the bank more (interest) just so you can save money on taxes?! That makes zero financial sense if you can afford to pay off the mortgage early.
2) Lose a low borrowing cost?! So you’d prefer to pay 3% interest over no interest (due to no debt or paid off early debt)?
4) Decrease your financial return?! So you’d prefer to trick yourself into believing you’re making a great investment because you’ve kept your down payment and/or equity low? You ignore the negative return caused by the interest!
Come on, Sam, you’re smarter than this!
The other two reasons are legit…delete the three above, it’s not wise advice. It’s the advice of banks.
Cheers.
I’m actually not very smart, which is why I need you guys to provide your wisdom!
1) Mind the liquidity gap
2) Mind the liquidity gap
4) It’s about maximizing your capital. If you have other investments returning more, then think twice about paying down a sub 4% debt that’s deductible.
Are you for, or against me paying off my mortgage I took out in 2003? What’s your current mortgage/real estate scenario?
Hi Sam,
Well, I know you’re quite smart because you’ve been able to alleviate yourself from the corporate handcuff (to which I’m still shackled) to build multiple passive income streams and greater freedom with each month.
My comment had a bit more sass than it needed.
I get the liquidity gap point. If the question is pay down the mortgage or increase investments, there’s a lot to consider and your items fall into that thought process.
I agree with your pay down of the 2003 mortgage – more income has become free for new investments or to build up that $100k reserve you’ve talked about. I’ve been listening to too much Dave Ramsey recently and the idea of being debt free has really taken a hold of me, although I realize the value in carrying leverage to maximize income potential and asset value growth 10, 15, 20 years down the road
What I don’t like is rationalizing carrying debt because of a tax break or not considering the cost of debt with the rental income in the ROI equation. It’s easy for all of us (since we’re human) to rationalize decisions to our favor and I think this hurts good decision making.
The only exposure I have to real estate is $20k or so in a REIT, which has treated me quite well since 2007 – but I have yet to indulge myself in “real” estates! Some day though…
Dave Ramsey is the guy who lives in that 13,000 square foot mansion in Cool Springs right? What a lucky man of God :)
If everybody didn’t have a mortgage, the financial crisis wouldn’t have happened. So yes, I can definitely get behind more people for paying cash or putting way more down than 20%. I cringe at those putting 3% down per the government loan programs. It’s nuts, just like the Cash For Clunkers program.
I’m very focused on capital optimization. I’ve done the math and if one is going to make around $250,000 – $350,000 a year, then it’s pretty optimal w/ a mortgage rate of under 4% to borrow up to $1M, while investing the money in other asset classes. The laws and tax system has created this ratio.
What $ of your net worth is $20K in REIT, and how is your net worth broken down?
Once you procreate your financial outlooks, objectives and lifestyle change greatly.
What was the real motivation behind paying off the mortgage?
– Was it to feel more secure? Done.
– Increase cash flow? Done
– Pride of ownership and sense of accomplishment? Done
– To free up time? Done
If it was one of these things, then it’s never a good idea to complain about getting the thing that we want.
I’m guessing that you’re probably like me though, in the fact that you always need a goal to be striving towards. It’s life giving to have tasks that we devote our lives to, whether that is paying off a mortgage or running a marathon.
A trick I’ve found is to have massive goals that I can break down into smaller steps. For instance, owning 20 properties in cash is broken into 20 separate goals that keep me motivated. Each goal drives me and keeps me motivated, but can be enjoyed and celebrated along the way.
There’s no complaining. There’s just sharing.
We just locked in a new mortgage. There has been so much press about the fed raising rates, but rates are still low.
I wonder why no one said pay one buy another property… thats not enough motivation to work harder? Buy two more then… i was supposed to have 1 more year to pay off my property but, moved into a bigger house much bettter location. Still, thinking what to do next.
I’ve reached asset accumulation fatigue. Four is enough, and I’m seriously thinking of downsizing to three next year. How many properties do you have?
The correct number of properties to own is: as many as you can find that create positive cash flow!
You need to not just leverage your money, but also leverage your TIME – get a property manager! I could only own AND manage a handful of properties with the work I do, and even then, I wouldn’t be able to manage them effectively. I would probably get burnt out, because I don’t like the management aspect.
I use my brain/body to find good deals, and I pay other people to be in places I can’t be, so that I can stay in a place that is a better return on my TIME asset! Any property I buy, I run the numbers assuming that I will have to pay 10 percent for property management – even though I don’t have PM now, if I figure it in when I do my purchase calculations, so that I KNOW it will make sense if I do have to use them.
I routinely pull equity from paid-down properties to put down payments on additional properties, so that my out of pocket is negligible – usually just the earnest money when I purchase the property. Then I effectively take a 100% loan on the new property.
We use 15 year mortgages, because our kids will be ready for college on about that timeline, and we like the overall lower interest expense, and lower rates compared to a 30 year note.
Our debt timeline went something like this:
-Graduate pharmacy school mid 2010 126k in debt w/ student loans
-Live off husbands salary and use mine to pay student loans off mid 2012
-Decide to pay off mortgage while we were at it…another 70k by end 2013 (yes we live in Midwest)
-Pop out baby #1 2014 (after 5 yrs married, no debt, I had my lasik and dream vacation, he bought boat). I cut back to working 2 days/wk. Why not.
-Upsize home 2015 and take out mortgage- baby #2 on way. We will pay off last 126k by 2024 (Less motivation this time around. We rolled half previous home sale into this and kept rest savings. We still go skiing in winter, another vaca to somewhere warm, max out 401k…just not bothered by mortgage payment currently).
Did I lose my motivation to work hard? I lost my motivation to work 5 days/wk. I kill it the two days I do work and love every minute of it. I also love mom life. I wouldn’t trade working more for a year to pay off this mortgage for the time I have at home with little one…soon to be littles ones
Thanks for sharing Debra. I have to imagine most moms/parents would lose serious motivation to work so they could be with their children growing up. I’ll let you know if I ever get there!
Totally agree with you Deb! As a mom of 3 kids, I worked for years then had kids and decided to forgo the great salary and stay home- don’t regret it one bit! You have 1 shot at this and they grow up fast! Plus I see my career crazy friends and they don’t have the energy to discipline the kids which is not good as they can get into trouble & I’ve seen it. Sounds like you have the perfect balance.
Food for thought:
Maybe paying off your mortgage felt less rewarding because you have 3 others to pay off.
Could be a factor!although, I wonder if disappointment and greed would take over for not being as leveraged in a bull market upswing as possible.
I don’t know, Sam. I get what you are saying. Debt can be an immensely powerful motivator to work hard. It was for us in our battle to pay off over $140k of debt. But not paying off your mortgage because you need the debt to motivate you seems illogical. To me, that’s like saying you should eat a bunch of donuts in order to get motivation to work out harder at the gym. I am pretty sure other forms of motivation can be found keep your drive up and fuel the creative fire within you. Maybe philanthropic efforts? I sure wouldn’t hesitate for a moment to pay off our mortgage if was within our means.
Oh no, I’m not saying get debt for the sole purpose of gaining motivation. Sorry if this post read that way.
All im sharing is my observation on th biggest downside, among other downsides in paying off one’s mortgage. I got into debt to buy a nicer place to live because I was sick of living in a crappy one bedroom in my 20s. I also took in a mortgage to gain exposure to SF real estate in 2003. I wanted to get long in 2001, but had a job change then.
I think about this a lot, Sam. I’ve got one mortgage and I refinanced to a 15-year loan at 3.25% a few years ago. With ~$130K left, I probably won’t be paying it down early. I’ve got almost an acre in a hot inner city neighborhood in Nashville w/ $100K equity. I want to eventually add additional dwellings onto the property.
With a 15 year loan, you’re on the automatic fast track, so yah might as well stick to that plan!
Paying off my mortgage early helped me make more money per hour as I felt the freedom to move around as a contractor. Some contracts were lucrative but short term and I found myself without work, so having a low monthly expense helps cushion that blow.
Prior I took safe but less than ideal jobs.
You are right about not having the motivation to work extra hours. But I have found fear a terrible long term motivation anyway that comes with its own problems. The freedom felt with no mortgage surpasses all the cons IMHO.
That definitely is a positive angle to look at.
It’s really “manufactured fear” with a backstop knowing that the worst case scenario is still OK. That’s the “issue” with living in America. The worst case scenario is still better than so many other parts of the world’s average scenario.
Seems like a lot of capital tied up for a little monthly payoff. Why not sell and throw it into some preferred and reits, never touch the principal and enjoy the dividends?
Although $4,000 a month in rent is not huge, the rent is going up to $4,100 – $4,300 a month next June and the place is relatively easy to maintain for the income amount. If the rent was closer to $2,000 a month, I may reconsider. The market is definitely strong now, and I think we’ve got at most two years left before prices stop growing or goes down.
But over the long run, I’m bullish on SF property and think it’s one of the cheapest international cities in the world. The tech/internet industry will continue to grow, and the incomes are eye popping now for college graduates ($100,000 to start). All these guys will make more they decide to settle down in their late 20s and 30s. Supply is limited here b/c you can’t build. And, the lifestyle and weather is amazing.
How’s your rental income/passive income doing? Do you have a target? I’m still $50K away from my passive income target.
I’m close to $750 a month from dividends and $200-300 a mnth from sales residuals. I would love to hit $2k a mnth before age 40…(35). My goal in life is to escape the 9-5 grind but it’s gonna be a couple years (
San Fran and Manhattan real estate will always hold up, there is only so much limited space. My uncle bought a 2-bedroom condo on California st in 1981, he is up 18 fold…
I also meet clients(seniors) all the time that own paid off $750k real estate but have under $20k in income and live in almost poverty….In those cases I think they are crazy to stay but they refuse to sell.
Yup, I know what you mean. I paid off my mortgage years ago and, about a year later, went out and bought a bigger house on a repayment mortgage. I figured that, with no mortgage, I was putting far too much of my increased savings into equities and should put more into property, but I couldn’t be bothered with rentals, buying a villa abroad etc. etc.. And, if I bought a bigger house in a nicer area, I’d hopefully get the daily pleasure from living there. I don’t really regret doing it and still see my house as part of my investment portfolio – as well as it being where I live.
Hi Jim,
Is your paid off house a rental now? Or did you sell it to help fund the new house?
I agree about buying property for lifestyle first, then capital appreciation and rental income.
Hey Sam,
The 4 first point that you make do make sense from a pure financial point of view. There is not a lot to argue against that.
The question is if it is the right solution for everybody?
Personally, we have been paying down our mortgage faster than needed. Both on the rental property (sold in the mean time) as on our main house.
1- due to the tax situation in Belgium, we did not loose interest rate reduction. we make sure we stay above the threshold.
2- Loose low borrowing power: as we do not plan to buy the next 15 years (never say never), this is not valid for us. I admit, I have no idea where the rates will be 15 years from now, but it is a non issue at this moment in time.
3- Tie up capital in illiquid asset: As it is our long term plan to live in our main house, it will be paid off before we plan to move. We do make sure we are insured as needed to cover disasters.
The advantage of this tie-up-of capital is that we will own the house outright in about 9years. This comes with a big peace-of-mind for us that is worth a lot.
In my net worth, I do not take my main house in consideration. Even if I would, we are about 50pct in real estate. Not sure if real estate is better or worse than the stock market, or alternatives, as they all have crash periods where they make paper loss of 50pct and above.
4- decrease financial returns: If you speak of a rental, then this is true. But you need to take into consideration the effect of investing the free cash flow at an average of 8pct over time. I am curious to see what this would give in various scenarios. With the bigger down payment, the free cash flow would be bigger.
5- Less efficient with your time: This is a very personal argument. My time efficiency does not depend on the mortgages that I have. My drive to work comes from other items like the will to realize projects and see results.
“The only people who really complain about having no debt are those who are greedy for more money. ” –> Good thing that it says: people that complain. There are people that are debt free to have peace of mind, to live the life they want worry free off obligations. So, I think I agree with you on this one (I needed to read it a few times…)
Thx for putting up the article. It gives good discussion and insight to consider when investing in real estate.
There is no one solution for everybody. No way. The Debt / Cash ratio I’ve provide is a guideline by age / work experience for financial security. And this article gives people who are focused on paying off their mortgage a glimpse of what may happen. The feelings are very real, and real time. I don’t think many other people would bother to share, but I will until I’m totally demotivated :)
Please read, “How Does It Feel To Be Financially Independent” and “What Does Early Retirement Feel Like?“
I have to tell you Sam, very confused by this article. At the end of it you casually mention you have three other mortgages. Why isn’t that motivating? Imagine a scenario where the local economy blows up (very possible since SF is dependent upon primarily one industry, 3 st most if you include finance/touridm) and your renters stop paying. Now you’re left with three mortgages and no cash flow. I would want to get out from under that weight on my shoulders ASAP.
I’m not sure what your total net worth is relative to the market value of your homes. But if the total market value of your homes is more than 50% of your net worth, I’d be scared every morning I woke up. Not suggesting it’s necessarily a bad thing, as you describe there’s an advantage to leverage. However, there’s also the risk that comes with it…
It’s weird isn’t it? Part of the reason is I’ve had three mortgages for eight years already, so I’ve grown accustomed to them. When I got my fourth last June, it felt too much, so I paid off my oldest one.
One mortgage is a primary mortgage of my new house, so I tie that to my current total income. B/c the total monthly payment is less than 10% of total income, I don’t feel scared. I really like carrying a max mortgage amount based on a 2.5% interest rate.
The other mortgage is a vacation property mortgage. B/c it was a badly timed purchase and is a 30-year fixed mortgage, I don’t want to throw good money after bad. I’ll let the payment run its course over the next 22 years to have it fully paid off.
The final mortgage is another rental where total rent is about 50% higher than total monthly cost, and 100% higher if we don’t include the principal pay down of each mortgage payment. This one, I’m not so sure what to do. If the experience of renting it out is OK, then I will keep it as the cash flow is the highest. It’s also the most expensive property in my portfolio, which can therefore lose value (or gain) the quickest. Hence, maybe I will sell to de-risk at one point.
Like I say in the article, it’s only when things get a little dire, when you really start to get motivated to hustle. Real estate is about 40% of my net worth, and maybe less, depending on how to value my business.
One thing to note is that rents went UP during the dotcom collapse from 2000-2003, and UP again during the economic crisis from 2008-2010. I know, b/c I was a renter and landlord during this time period.
This article simply shares with the community the real things that I feel. And the lack of motivation is the biggest downside.
Please share with us what your current debt and motivation situation is. Thanks!
I’m fairly risk averse when it comes to property (perhaps a mistake). My primary property was purchased in 2010 near the bottom of the Atlanta market. So… it’s a 2 bdr condo and my mortgage is ~$95k. I have ~$150k in cash (if you include CDs) and the rest of my net worth is in equities (mostly sector ETFs), some P2P lending and bonds. Still looking for that unicorn private equity or hedge play!
Honestly the reason my mortgage is so low is for lifestyle reasons, as much as financial. I don’t know how long I will be in Atlanta (though I’ve been saying that for 5 years now)… and I travel 250+ days of the year. So, it’s really all I need right now (single guy) and it’s 99% maintenance free.
I thought about buying a townhouse or something… but that’s too much space for one person and a lot of wasted utilities. So, I figured I would wait until a significant lifestyle change took place to upgrade (marriage, job change, etc). I may or may not keep this place when I buy another. I like the idea of trying my hand at landlording… but my HOA makes it tough to lease out.
A $95K mortgage and $150K cash is pretty conservative, which is absolutely fine. Is there a reason why you don’t want to pay it off and have $55K in cash? How much do you have invested in the markets, what is your total net worth, and how old are you?
30 years old, ~$600k
I guess I enjoy the tax write-off and having the surplus cash at hand. (To invest in property, equities, X factor business, whatever!)
Thoughts?
Agreed. It is hard to be motivated now at work since I paid off the mortgage. So, now I am paying rental rates in Chicago for my living expenses. (My taxes are $425 a month, assessments are now $210 a month and taxes and assessments are going to go up yearly). Utilities is about $350 a month ($142.50 cable, $35 gas in summer, $200 gas in winter, electric from $50- $100 depending on weather). My mortgage was about $600 so I am saving that money. The extra money that I was using to pay off my mortgage is now going to savings, hanging out with friends/co-worker and traveling more as I stopped doing much of that when I focused on paying off the mortgage.
I like the idea of paying off your mortgage. I do disagree with some of the reasons not to, but many of those are personal preference. Some people don’t mind carrying debt, others, like me, would rather not. Yes, debt is a great motivator, but, now that I have paid off my mortgage, I feel I can take more risks, not less. For me, it gives me a better sense of where I am financially, and when making financial decisions, there is no more mortgage albatross hanging around my neck.
This was a relatively recent decision for me. For a while, I just paid the interest, and dollar-cost averaged what would have been the principal payment into other investments. This just gave my wife and I a little more liquidity until we decided how long we wanted to stay in the house. We’ve decided to keep this house long term, so might as well pay it off. If someone wasn’t planning to keep their house into retirement, then there would be less reason to pay it off.
So that’s a middle road option for someone unsure of what to do. Just save what would be the principal payment somewhere else for a while. Paying off your mortgage is one thing; having the ability to pay it down when you want is equally as good. The spreadsheet doesn’t always contain the right answer for everyone. Part of the decision is definitely a personal one.
That’s very interesting that you had an interest-only loan. I can see why you’d actually want to lob some principal down to make SOME progress in paying down the debt. Do you feel you bought too much house based off your income?
Hi Sam, No, I didn’t buy too big a house for my income, quite the opposite actually. We’ve been in the same house for over 20 yrs now. It’s the same house we bought when our combined income was 50k per year; it’s now 10x that! The interest only mortgage was a refi choice. When rates were around 3%, and after writing them off you were down to 2%, it was almost free money. Again, we didn’t blow the difference, we just dollar cost averaged what would have been principal payments into other investments so we could always apply the capital toward the home if we wanted (or needed) to. We ended up just paying it off through current income, and didn’t touch the investments.
I think the interest only framework is great for people who are disciplined savers. It gives great flexibility for your monthly cash flow, and it does reduce your monthly obligation if you need to direct capital elsewhere. Plus, interest only mortgages are simple-interest vehicles, so, if you do use a chunk of capital to pay some of it down, your next monthly bill is less; you only owe interest on the remaining balance. Very different from a traditional mortgage where you can send a big chunk one month, and your next month’s bill is the same.
Keep up the good work!
In a traditional mortgage, the bill will be the same after you’ve applied a big chunk to principal but the proportion of interest:principal will skew to more principal.
You can cut several years off the loan by making extra principal payments, i.e. $100/month, in the early years of the loan.
Sam,
I feel your passion, and like you without something to work for I too become lazy. For us it was having a child that gave me a strong kick in the butt, especially since education costs for International school in Asia run very expensive and start from age 3. So now I’m working harder than ever but am driven by a tangible goal. It’s not a bad thing.
You mentioned you wanted to have kids one day- that will certainly reignite your passion.
-Mike
Mike,
I’ve been thinking of the family thing for a while now. Might be time! ISKL in Kuala Lumpur is $40,000 a year. Ouch! Gotta get one’s employer to handle that bill.
S
The growing trend is that employers don’t cover that anymore but pay a higher salary for a “localized” package. It all comes out of the same pot so it’d be hard to pull down the big bucks of a few hundred K a year plus school included. It depends on the company and the location. Also if the company pays for the school the employee is liable for the tax on this (35% where I live).
-Mike
Very interesting! Guess it makes sense that a $40,000 a year tuition paid for by the employer is like income, and should be taxed by the recipient of the benefit.
I 150% disagree with this article’s point of view. Let’s go step by step:
01. “Without debt, life is easy. And when life is easy, why would anyone but the craziest of people bother to take risks? It’s totally irrational to work hard if there’s no financial burden.”
FALSE. I for one, prefer to feel free, without any chains or ropes around my neck. Also, the benefit of $0 debt is that no “Damocles’ sword” will hang upon you head, should you lose your job (or whatever the primary source of income is). Absolutely no stress and free to flee like a bird, even change cities, states, countries, and even continents (rest assured that I was/am doing what I am preaching right here).
02. “The biggest downside to paying off your mortgage is the complete loss of motivation to take risks and work hard. Only when your back is against the wall will you do everything possible to change. Having a mortgage is like an implicit back stop to not slack off.”
FALSE. Why would one assume that the mob/herd/common folk should be treated like an irrational animal, with coercion and ‘carrot-and-stick’ attitude? This is absolute immature as mindset and philosophy of life.
03. “You lose your mortgage interest deduction. The mortgage interest is treated like a business expense for rental property and a tax deduction if its your primary residence. The higher your tax bracket, the more valuable the interest expense.”
Hmm, you forgot to mention that for non-business expense reporting purposes, one would have to itemize, instead of opting for standard deduction. If the mortgage interest deduction make for much more than that, then yeah, it’s advantageous. Also, why should I fatten the greedy Banksters’ already-fat pockets and yacht, caviar and champagne!? I prefer to not have any mortgage at all, in the first place!
04. “You lose a low borrowing cost.”
Isn’t it better to hard work and massively save money for whatever project or needs you have? Why pay the greedy Banskters – the ones with the monopoly of creating ‘money’ out of nothing?
05. “You tie up capital in an illiquid asset.”
Seriously? And whecould n you make the monthly payments to your mortgage, aren’t you still transferring out your own capital to others? Yes, it’s true on the other hand that you decide to sell the house and have the new buyer picking up ‘the tab’. But the same can be done when you are a real, 100%, cash-down owner of a ‘house’. I’m using quotes for the term ‘house’ intentionally here, because what we call ‘houses’ here in the whole North-America (Canada included) is pure CRAP. Wooden barracks, disposable homes, that one could not safely pass from a generation to next. Not even that wood is real wood but recycled pieces of wood glued together. Fire anyone? If you’re looking for HOUSES, see Europe: concrete, brick, mortar, steel roofing, rock-solid energy efficient heating systems (not the other “watter barrel” water heaters or “forced air” “heating” CRAP). That’s what I call a HOUSE.
(have you ever wondered WHY high-rise buildings, or low-rise governmental buildings, schools, libraries, retirement homes, hospitals etc are ALWAYS built correctly and not out of wood crap!? Simple, because those are meant to last, not to be disposable. But I digress).
06. “You decrease your financial returns.”
True only partially. If you’re talking about financial SPECULATION called “stock market” (which is also rigged – see the CIA’s “Stock Market Plunge Protection Team” and read one of Richard Ney’s books i.e. “The WallStreet Gang”), then yes, it’s true. But for “safe” investments like CDs, saving accounts, bonds etc, the mortgage interest, no matter how “low historically” is, is still considerably higher – to FATTEN the banksters’ pockets and bellies!
07. When it comes to making money, less debt can make you less disciplined.
Total BS.
08. The only people who really complain about having no debt are those who are greedy for more money.
FALSE. I am one of the people who does not own a cent to anyone. And I don’t think I’m greedy or grumpy and complaining. My only frustration is that I have YET to find a way to PRESERVE the capital I’m making from my employment income (being also the sole breadwinner of a family of 4). I desire neither to speculate, nor to make more money out of nothing. I only want to preserve the fruits of my hard work (inflation-protect it). For example, as a beautiful analogy – I’m looking for a way to get something similar to those grandma’s confiture jars, so that I can enjoy them many years after they were made. Perhaps someone here on the forum can come up with a great & working idea as to how to achieve such goals.
09. “After inputting various realistic expenses in my retirement planning calculator, I’ve calculated that I can pay off all debt using current and anticipated cash flow in under 20 years.”
So, why paying 150k-250k more over the life of that debt to the banksters? Simply because ‘time is money’ ?!
10. Regarding you poll, one option is missing here:
“-Poll: How many mortgages do you have?
=> None, because I paid it all off already.
=> None, because I don’t own property.”
Please add another option there: “None, because I purchased my house through hard-working, sweat, responsibility, massive savings rate, and decent frugality”. And I will vote for that option, because that’s me and what I did. Crazy, eh?
Thanks for your time.
Love the passion and criticism! Just to clarify, why are you still working for the man then? Is it because you love your job? Don’t get me wrong, we need more people to work in order to pay taxes to help those of us who do not work.
Can you tell us about your financial situation and age?
Also, do you approve or disapprove of my mortgage paydown? It’s hard to tell based on your comment.
Thx
Vasile,
Regarding your point number 8, consider buying assets that pay a regular income stream and are inflation protected. Stocks with a long dividend history and solid balance sheet that are in consumer staples and defensive sectors have such pricing power and a decades long track record of dividend growth and are a good place to park your savings. I was as frustrated as you until a few years back and since then I’ve been adopting the above strategy and am happy about this thus far, even with the market turning downwards. The difference between investing and speculating is that the former has a mathematical expectation of results and the latter does not- this is due to investing in an asset that has a reasonable chance of providing continued cash flows and distributions to the owner.
Knowledge is power.
-Mike
A few points:
1) I agree w/ Mike regarding dividend stocks. I’m my own mutual fund holding the higher yielding dividend aristocrats, Dogs of the DOW, etc. Not concerned if the market drops, only if a company cuts their dividend!
2) Sam’s Point #1 – “mortgage interest deduction” is still silly to me. Pay the bank $1000 interest so uncle sam will give you back $250? (or so depending on tax bracket). You’re out $750 of disposable/investable income. Without the mortgage, I’ll pay $250 in taxes and have $750 in my pocket. The only reasonable arguments I’ve heard for having a mortgage are Sam’s #4 leverage and the one he didn’t mention – in the future, you’re paying with cheaper ‘inflated’ dollars.
3) Several decades ago I had a custom home built. After moving in, I actually felt ‘a void or emptiness’ because I’d spent almost a year immersed the design, planning, and construction process, suddenly there was nothing to focus on… you might simply need a new goal.
Congratulations, Sam! I am paying down my mortgage aggressively and I can’t wait for the day when I own my condo in full. My living expenses will be about equal to my ESPP contributions plus discount! So my plan once I pay off my mortgage is to invest my entire paycheck and live off of my quarterly ESPP proceeds.
That will be a great plan! When will that year be?
It’s looking like the fall of 2017 at the moment, around my 29th birthday!
Sam, interesting topic. I believe that paying off a mortgage is a matter of personal/emotional preference as much as it is what makes sense financially. Having a tangible “home” is security for a family.
I think mine stems from the fact I saw my parents lose their house to forclosure during the late ’70, early ’80 skyrocketing interest rates and inflation as well as struggling to make ends meet. Therefore, after living for years in rental homes, apartments and struggling to see my parents keep the lights on and food on the table … I personally vowed to study and understand personal economics and become finanically independent and most importantly not put my family through how I grew up and keep a solid foundation and sense of security with owning our home first and foremost. I guess this was my motivation early on based on my child/adolescence years … therefore, I put in the effort, worked hard, funded my own education through academics/athletics, received a degree and fortunately a very solid 30 year career so far.
We personally have paid off 2 mortgages well before their time. Our first “starter” house after 17 years and the home we currently live in after 10 years. Both homes were newly constructed with no upgrades as I am very handy and through the years have added sweat equity to both homes building sanctuaries both inside and out.
My wife and I are 52, with a goal of retiring at 55 to pursue other interests. My wife has stayed at home to raise our kids, although I have been nudging her to go back to work so I can retire earlier :-). Both of my parents died relatively young (early 60’s) … although my wife and I are very healthy…we never know how much time we have. Again, another personal motivation of why we have no mortgage…option to retire early.
We have no debt, $2.6M Networth (17% Home Equity; 12% Cash; 18% Taxable Investments and 53% in Non-Taxable Investments) – 2 Children (Both educations paid (4-Years Only)…they are funding their respective graduate degrees themselves while working).
Again, very interesting topic, very insightful site and excellent comments from both you and your readers. I have recommended your site to numerous collegues, friends and especially my kids. Keep up the good work!
Thank you!
Hi Paul! Thanks for sharing your story. Have you read, How To Convince Your Spouse To Work Longer So You Can Retire Earlier? Some helpful tips to get your wife working again :)
With a $2.6M NW and 71% in taxable and non-taxable securities, I would say you guys can probably retire now if you want to. SS will kick in 12 years from now too. Is there a pension you’re hoping to get?
I hope you guys live long after your parents!
Thanks Sam. Yes, I have read your post about convincing your Spouse to work longer…I will have to tread lightly :-) … Yes, thought about retiring now … but 55 is my number as I will receive a small pension that I will use to pay for annual health insurance. Secondly, I anticipate a wedding in the next 2 years … I like my job and people I’m working with and the stress is tolerable. What I really want to do is look for ways to add more passive income outside of dividends, investment gains while keeping me busy doing what I like to do. That’s my next big hurdle and I don’t know where to start. Any suggestions?
Sam, I think you’re just bored. I’m not inside your brain, of course, and I’m not trying to tell you how you feel, but it sounds to me like you didn’t lose motivation because you have one less mortgage (as you mentioned, you still have a few more you could get fired up to tackle). It sounds like you just temporarily lost a little bit of your fire. It comes in cycles, at least for me.
You could just enjoy the break, and wait for the fire to come back. Or you could try to find a new thing to get you excited again (a new property, perhaps?). Or maybe even consider a career shift, or volunteer work, or something you wouldn’t normally do.
If I were you, though, I would not sell the property. Unless you really are burning the candle at both ends and you can’t stand the stress of the tenants in that property, I would just hang on to it. Because most likely, this energy slump of yours will pass and you will wish you had the property back. If you really have the urge to simplify, hire a management company to manage the property for you. You’ll still get some of your income from the property, but you won’t have the stress. I bet a few months’ worth of looking at what the management company charges and thinking “heck, I should be doing this myself” might snap you back into work mode.
I hurriedly paid off a chunk of debt and sold off my boat anchor of a condo (NOT a good rental property), and that threw me into a bit of limbo for a while, too. I was working for so long at paying off debt, that I felt insecure, like I was at a weird crossroads, after I paid that off. My next step is to save aggressively and get a fourplex, and pay that down faster. You just need a next goal to work on. Hang in there.
In the past, I would agree w/ you that I’m bored. However, after going to the DMZ, Ankor Wat, and being a tennis junkie at the US Open for 10 hours a day for four sessions… I’m actually not bored. I used to say/think I was bored a lot. Now, I’m just demotivated to work extra than normal or take on new challenges.
I suspect an ebb and flow. Working small projects to improve my house here and there has helped. It’s probably time to start a family.
” It’s probably time to start a family.”
Father of 3 boys here. I assure you that will cure your boredom. Might lose your sanity, but will never be bored.
Mike, your comment made me laugh out loud. :)
As long as a person doesn’t have too much of their net wealth in their house, that person should be good. As indicated in your post, recommended asset allocation by age, no one should pile into real estate, unless they go the self-belief route.
The leverage aspect kind of stinks, but a person won’t blow themselves up (leverage works in the opposite way too!)
I might be in the camp that having debt is a bad thing, but having an extra $1,308 in the bank a month sounds like a good thing to not complain about.
Have a good one,
Erik
Agreed. When housing went down in the last crisis, it took the median American net worth down by the same percentage b/c housing accounted for 80% plus of the median American net worth! That is crazy high.
Would say Congratulation that you’d done it!
Was thinking also paying off my mortgage early. This is the only debt my family has and it not that much. But if I see I have a surplus I might end up buying expensive wine than a three-buck-chuck (already include inflation here).
Thanks REM. How are you doing on my recommended debt / cash guide by age or work experience?
Wow! You hit the nail on the head for me. I have been trying to find some real motivation, but it’s been hard since I am doing well financially. This post helped put some perspective on it, since I too am very goal orientated. Having a big mortgage hanging over my head would definitely be the fire needed to get that taken care of quick like. Thanks for giving me something to think over.
– HMB
I agree with the idea of keeping mortgages as long as possible in most situations with the rates being what they area. I just purchased a home with <20% down so I am making extra payments until I can kill PMI. After that, I plan to just make the minimum payments for the remainder of the mortgage. My rate is 4.00%, but once you figure in tax and inflation, the interest costs almost nothing
Yes, please get up to a LTV of 80%. PMI is a waste of money.
Also, 4% is OK, but not an amazing rate. I take it you took out a 30-year fixed? The 10-year yield is at 2.2%. I’m a fan of shorter fixed duration loans. See article.
That is valid. I hope to kill the PMI in about a year. At that point, it would definitely be worthwhile to at least look into a refinancing
Agree that having PMI is now a waste of money. But in years prior when it was deductible like interest, the argument for having it was different.
Good luck! We got out of PMI a few months ago (took us two years total), and it’s such a great feeling. I always felt a little like I was getting robbed when I would do the math on how I was paying .42% on my ENTIRE LOAN for not having the much smaller chunk of money (6.25% of the loan) necessary to get out of PMI. I don’t regret buying without 20%, but I am very glad that that monkey is gone.
Completely agree on the power of a sense of urgency, even if it’s artificial.
However, the older (and hopefully wiser) I get, the more I value my time and my experiences over money. As long as I have the money I need to live the life I want, in not motivated to work harder just to have more money.
With all your “wasteful” experiences this year you’re enjoying the freedom you’ve earned.
Enjoy it.
I hope to be in the same boat one day.
Jack, another thing that will happen is that you’ll STOP putting up with crap at work. Those little Friday night requests and annoying co-workers will become MUCH MORE ANNOYING once you pay off your debts.
We have been in the middle of a 10-year debt snowball to pay off our personal and rental property mortgages. Our personal home was paid off in March 2015 and we have only until March 2016 before the last of our rental properties are paid off. We will then be fully debt free!
I agree with you Sam, suspecting that our motivation and drive to work and make extra money in our side hustles will decline. We are actually looking forward to enjoying some of this money for fun and travel, instead of dropping big chunks on mortgages. I wonder if our spending will go up. :)
I like how you have a SPECIFIC DATE for your payoff plan. That is huge, and I’ve got no doubt you’ll achieve your debt payoff goal.
Please do report back then how you feel after paying of the rental property mortgages three months later. I’ll be curious to see whether your motivation to hustle drops!
Most people try to pay off their mortgage by age 65 because they need that money to pay for Medicare insurance, some couples to the tune of $1000 a month and that’s without dental insurance which is a major scam.
Look at what that sense of urgency made you do! Sure you lost that, but would you have ever gained it in the first place if you didn’t set that specific goal to pay it all off? I still plan to pay my mortgage off early, but I’m certainly not throwing everything at it. But I love hearing your take on it after having actually done it yourself. And it is great to think about the pros and cons (I realize there are mostly cons to paying it off early!)
Howdy Maggie,
Probably not as much w/out a goal! I did feel naturally uncomfortable shouldering another mortgage last year, hence maybe I would have naturally paid off the one I just did. That said, I told myself I’d pay off this mortgage I took out in 2003 after 10 years by June, 2013, and I didn’t b/c I didn’t have a focused goal! Hence, I encourage everyone to have goals.
I’m just warning everybody on an early mortgage pay down mode to manage their liquidity carefully, and warn them that it’s not all lemon meringue pie after the mortgage is paid off. The feeling of accomplishment is ephemeral, and losing motivation can be very real, as is w/ me this year.
I’m even not as gung ho publishing new posts anymore!
S
Oh dear! That is bad. I was really hoping for all lemon meringue pie! NUTS! Thanks for the warning. :)